Unit 3.3: Cost and Revenues

Cost

• Expenditure incurred by the business 

Price

Sum paid by the customer to purchase a good/service

Set-up costs:

• Items of expenditure needed to start the business

  • Property/ buildings

  • Capital equipment and utility 

  • Initial stock

  • Legal and professional fees

Running costs

• Ongoing costs of operating the business 

  • Mortgages/ rents

  • Wages/salaries 

  • Replenishing stocks 

Fixed Costs

• Cost of production that must be paid regardless of how much is produced or sold 

  • The cost must be paid even if there are no outputs: Independent of the level of output or sales

    • They can still change but this has nothing to do with their profits or productions 

Variable Costs:

• Costs of production that change in proportion with the level of output or sales

  • Eg with increased production of things they will need more material and that increases the cost proportionally 

• Adding the total variable costs to the fixed costs gives the value of total costs (TC)

• TC = TVC +TFC

Direct Costs

• pecifically related to an individual project or the output of a particular product

  • WIthout the project/ output of the product this cost wouldn't exist 

  • Can be both variable or fixed costs 

  • It being a variable or fixed cost is dependent on the business 

Indirect Costs/ Overheads

• those that cannot be clearly traced to the production or sale of any single product.

  • Eg utility, legal fees, advertising, salaries etc…

  • SOmething that is related to all areas of business than just one direct output 

Revenue

Money coming into a business 

• Sales/Total Revenue = Price x Quantity Sold

profit

• When there is a positive difference between the revenue and the cost

Revenue Streams

 Money that is coming into a business that aren’t from the sales of goods and services 

1. Advertising revenue

2. Transaction Fees

3. Franchise Costs and Royalties

4. Sponsorship Revenue

5. Subscription Fee: 

6. Merchandise

7. Interest Earnings

8. Dividends

9. Donations

10. Subventions

Advertising revenue

Method creators can use to make money online

• Selling space on your website or monetizing your content on social media

• Cost per click: Advertisers pay only when customers actually click on the advert 

• Cost per thousand impressions: Advertisers pay based on the number of times their adverts are displayed

Transaction Fees

• Like the amount it costs to use a payment method - eg taking out money from your account might have a transaction fee

Franchise Costs and Royalties

• Franchisees pay a fee to the franchisor to purchase the right to use its brand name, logos and trademarks.

  • The franchisee also pays a royalty payment based on the sales revenue of the franchised business

Sponsorship Revenue

• A form of below the-line promotion

• Sponsor financially supports an organization in return for prominent promotional display of the donor's brand and exclusive advertising rights.

Subscription Fee:

These charges are imposed on customers who use or access a good or service, based on a formal agreement

Merchandise

Service providers in the entertainment industry (such as cinemas, concerts, theatres and theme parks) rely on selling merchandise in addition to admissions charges

Interest Earnings

• Businesses that have a positive cash • Subventions - These are subsidies offered from the balance can earn interest on their cash deposits at a commercial bank

  • Savings

Dividends

Being a shareholder of other companies entitles a business to payments of any declared dividends.

Donations

• financial gifts from individuals or other organizations to a business

  • Charities and non-profit organizations such as schools, hospitals and universities rely heavily on donations as a regular revenue stream

Subventions

• Subsidies offered from the government to businesses to help reduce their production costs 

  • Normally for businesses that benefit society in some way - eg schools, hospitals or research facilities 

The triple bottom line (TBL):

A sustainability framework that revolves around the three P's: people, planet and profit

Formulas to know

1. Total Cost (TC) = TFC + TVC

2. Total variable cost (TVC) = AVC x Q

3. Total fixed costs (TFC) = AFC x Q

4. Average Fixed Cost (AFC) = TFC/Q

5. Average Variable Cost (AVC) = TVC/Q

6. Average Cost (AC) = TC/Q = AFC + AVC

7. Total Revenue (TR) = P x Q

8. Average Revenue (AR) = TR/Q = P

9. Price (P) = TR/Q

10. Average Revenue = Price

• Q = Quantity or level of output

• P is the price